Question

Roland Company operates a small factory in which it manufactures two products: A and B. Production and sales result for last year were as follow:

A       B  
Units sold       8,000           16,000      
Selling price per unit       65           52      
Variable costs per unit       35           30      
Fixed costs per unit       15           15      

For purposes of simplicity, the firm allocates total fixed costs over the total number of units of A and B produced and sold.

The research department has developed a new product (C) as a replacement for product B. Market studies show that Roland Company could sell 11,000 units of C next year at a price of $80, the variable costs per unit of C are $39. The introduction of product C will lead to a 10% increase in demand for product A and discontinuation of product B. If the company does not introduce the new product, it expects next year's result to be the same as last year's.
(a)

Calculate the net profit before the introduction of Product C.

Net Profit       $       

Answer 1

Sales revenue Less: Variable costs Contribution margin Less: Fixed costs Net Profit Product A $ 520,000 280,000 $ 240,000 Product B Total $ 832,000 $ 1,352,000 480,000 L 760,000 $ 352,000 $ 592,000 360,000 $ 232,000 Net Profit before introduction of Product C $ 232,000 Working Notes Product A Unit sold Sales revenue (8,000 x $65) Variable costs (8,000 $ 35) 8,000 520,000 280,000 Product B Unit sold Sales revenue (16,000 x $ 52) Variable costs (16,000 x $ 30) 16,000 832,000 480,000 24,000 Total fixed costs Total unit sold (8,000 + 16,000) Fixed cost per unit Fixed cost (24,000 x $ 15) $ 15 360,000